Earnings rise in U.S. banking industry, but bad assets could push them back down


The financial health of the U.S. banking industry improved slightly during the third quarter, with commercial banks and savings and loans posting net income of $2.8 billion. But the sector remains troubled, highlighted by the continued rise in the number of institutions in danger of failing, the Federal Deposit Insurance Corp. said today.

The weak gain in earnings from July to Sept. 30 reverses a $4.3-billion loss in the second quarter of the year and more than triples the earnings of $879 million a year ago. But earnings could drop in the fourth quarter of the year as banks undergo their traditional end-of-the-year writedown of bad assets, the FDIC said.

“Today’s report shows that while banks and thrift earnings have improved, the effects of the recession continue to be reflected in their financial performance,” said FDIC Chairwoman Sheila Bair.

Lending remains a problem as the total amount of loans on the rolls of U.S. banks fell by the largest percentage since the FDIC began reporting the data in 1984. Banks continued to set aside more money to cover potential loan losses, limiting the amount they can lend.

“There is no question that credit availability is an important issue for the economic recovery,” Bair said. “We need to see banks making more loans to their business customers. This is especially true for small businesses that rely on FDIC-insured institutions to provide over 60% of the credit they use.”

The number of banks on the FDIC’s “problem list” rose to 552, its highest level in 16 years.

So far this year, 124 banks have failed, 50 in the third quarter, according to the FDIC. Those failures have drained the FDIC fund that insures customer deposits, pushing it into the red in September and forcing the agency to levy additional fees on the industry to raise more money.

The number of banks in danger of failing -- identified by the FDIC as problem institutions -- has continued to rise. It hit 416 in the second quarter out of the approximately 8,100 FDIC-insured banks nationwide, the largest number since 1994. The FDIC did not project the number of failures in the fourth quarter or beyond, but expects failures to drain the insurance fund of $100 billion between 2009 to 2013, with most of that occuring this year and next.